Martin North: Mortgage stress highest ever in Australia

Martin North at DFA does monthly household surveys to assess the granularity of property data in Australia. What he finds is that one-third of households (about 1 million) are in mortgage stress. In Sydney, the problem is concentrated in the Western suburbs and inner city units.

Many Western and outer fringe households bought in at high prices and have experienced price falls of 30% or more. They are locked in because of little or no remaining equity and cannot refinance to get the benefit of lower rates. They have run down savings and run up credit cards in the hope that the situation would improve but there has been little movement in these areas and banks are starting to foreclose.

Inner city units have suffered similar price falls but also face the problem of poor construction standards which makes resale difficult.

Martin is skeptical of high auction clearance rates and recovery in prices, pointing out that this is largely restricted to the Eastern suburbs where households enjoy much lower mortgage exposure relative to property values.

Hat tip to Macrobusiness where I found the video.

 

Ultra-low interest rates may lead to a ‘debt trap’

The highly-regarded Stephen Bartholomeusz warns that central bank policies may lead to a ‘debt trap’:

“….With the world apparently re-starting the use of unconventional monetary policies even before central banks have extricated themselves from the legacies of a decade of those policies, there is a real risk that the impacts and the threats posed by their side effects will swell and that the world will be caught within what the BIS has previously described as a “debt trap’’ with no exit.

The other disturbing aspect of the [BIS] report is that it repeatedly says it is too early to assess the longer-term implications of the policies the central banks have employed.

Central bankers respond to the latest data – they respond to short-term signals – but the side-effects of their post-crisis policies have already been building for a decade and will continue to build while they maintain ultra-low or negative policy rates and keep buying bonds and other fixed interest securities to depress longer-term interest rates and suppress risk premia.

How those side-effects are unwound and how the banks extricate themselves from their policies and the legacies of those policies won’t be known until they try, but the potential for another crisis has been increased by the big surge in global leverage and the elevated asset prices the policies have encouraged.

Negative rates and quantitative easing and variations on those themes might, as the BIS report says, be useful additions to central bankers’ toolboxes but the past decade has shown they aren’t by themselves a panacea for economic ills and they bring with them potentially unpleasant side effects the longer they are in place.”

Debt traps occur when the interest rate needed to service the government debt is greater than the growth rate of GDP, according to former Fed governor Robert Heller:

“…In such a situation, debt service obligations grow more rapidly than the economy; eventually, the accumulated debt can no longer be serviced properly. In other words, the dynamics of the situation become unsustainable and a death spiral ensues.”

So far, central banks have responded by driving interest rates to record lows but unintended consequences are emerging, with low interest rates leading to low GDP growth. A feedback loop is emerging:

    • Low interest rates

Australia: 10-Year Bond Yield

    • Low bank interest margins

Australia: Bank Net Interest Margins

    • Low credit growth

Australia: Credit & Broad Money Growth

    • Low inflation

Australia: Underlying Inflation

    • And low economic growth

Australia: GDP Growth

We are venturing where angels fear to tread: central banks trialing new policies without empirical evidence as to their long-term consequences.

Monetary policy should be administered judiciously, intervening only when the financial system is in dire straits, outside the realm of the regular business cycle. Instead monetary policy is treated as a panacea, the constant drip-feed building a long-term dependence on further stimulus.

The problem with ‘traps’ is that they are difficult to escape.

“If you find yourself in a hole, the first thing to do is stop digging.”

~ Will Rogers

[NOTE: I should clarify that Australia has relatively low fiscal debt and is not in any immediate danger of a debt trap. But the ‘lucky country’ would suffer severely from fallout if the US or China were caught in a debt trap.]

Australian residential construction to decline until 2021 | ABC

One of Australia’s largest cement and construction materials producers, Adelaide Brighton Ltd (ABC), announced their half year results today. The media statement contains a decidedly bearish outlook for the housing market.

ABC logo

Operational Review

Demand for construction materials slowed further during the period. Australian residential construction approvals declined more than 25% on seasonally adjusted terms for the six months to June 2019 and residential construction is forecast to continue to decline until 2021, until it returns to growth. However, the Company expects both mining and infrastructure to increase demand for construction materials in the near term. Capacity expansion in iron ore and gold production, along with the reopening of nickel capacity, will increase the demand for both cement and lime in Western Australia and the Northern Territory.

Outlook

For the balance of 2019, Adelaide Brighton expects demand for construction materials to:

  • Weaken in east coast markets and South Australia, until the commencement of further planned infrastructure projects;
  • Remain stable in the Northern Territory and Western Australia;
  • Improve in the lime business as a result of increased gold and nickel production in Western Australia; and
  • Increase in concrete and aggregates due to more available work days, seasonality and volumes generated via Scotchy Pocket quarry.

Auction clearance rates in Sydney and Melbourne have improved but sales volumes remain low. We have witnessed recent improvement in consumer attitudes towards housing investment but whether this translates into increased activity will depend on:

    • APRA’s macro-prudential controls on bank lending;

Australia Housing Credit

  • The global economy;
  • Impact of the trade war on China’s economy; and
  • Domestic employment prospects.

Australia Unemployment & Underemployment

ASX: Iron ore plunges

Iron ore spot prices plunged from $120 to $106.50/tonne in two days. Penetration of the rising trendline is highly likely and would warn of a strong correction. A spike up is often followed by a spike down.

Iron Ore

The ASX 200 retreated from its 2007 high at 6830. Penetration of the rising trendline is now likely and would warn of a correction. The first line of support is 6350, with stronger support at 6000.

ASX 200

We have increased the level of cash in our Australian Growth portfolio.

Iron ore tailwinds lift the ASX

Further increases in iron ore prices are predicted. Enrico de la Cruz at Mining.com reports:

Singapore-based steel and iron ore data analytics firm Tivlon Technologies is keeping its price forecast of $150 a tonne by October.

“We expect the launch of infrastructure projects in China to peak in the third quarter and further uplift demand for steel,” it said in a note.

Narrow consolidation is a bullish sign, suggesting another advance.

Iron Ore

The Materials index continues its up-trend. A Trend Index above zero would signal increased buying pressure.

ASX 200 Materials

Financials continue to test resistance at 6450 but face headwinds from the housing market and construction.

ASX 200 Financials

The ASX 200 is testing its 2007 high at 6800. A rising Trend index indicates buying pressure. Penetration of the rising trendline on the index chart is unlikely but would warn of a correction.

ASX 200

We maintain a high level of cash in our Australian Growth portfolio because of expected headwinds from housing and construction.

ASX 200: Iron ore tailwinds continue

The ASX continues to enjoy a massive tailwind, with iron ore spot prices holding above $120/tonne. Prices are expected to moderate, with Brazilian exports recovering. Clyde Russell at Mining.com comments:

“Even if Brazil’s exports do remain slightly below normal, it may be the case that the iron ore forward curve is currently too optimistic. The Singapore Exchange front-month contract closed at $121.24 a tonne on Wednesday, while the six-month contract was at $100.52 and the 12-month at $89.52. This shows traders do expect prices to moderate…”

Iron Ore

The Materials index continues to climb, with rising troughs on the Trend Index signaling buying pressure.

ASX 200 Materials

REITs continue their strong up-trend, in expectation of lower interest rates. The equity (dividend) yield on VAP/ASX 300 REITs has fallen to 4.3%.

ASX 200 REITs

Financials are testing resistance at 6450 but face headwinds from declining house prices and construction work.

ASX 200 Financials

The ASX 200 is headed for a test of its 2007 high at 6830, with a rising Trend index indicating buying pressure. Penetration of the rising trendline on the index chart is not likely but would warn of a correction to test support at 6000.

ASX 200

We continue to maintain a high level of cash in our Australian Growth portfolio.

ASX tailwinds v. headwinds

The ASX continues to enjoy a massive external tailwind, with iron ore spot prices holding at $120/tonne.

Iron Ore

Headwinds stem mainly from domestic sources. Low employment and disposable income growth have slowed consumption, especially of durables such as housing and motor vehicles. Construction work done in the private engineering sector (mainly mining and energy related) continues to decline after a dramatic fall in 2013-2015. Public sector spending is also tailing off as the NBN roll-out winds down.

Australia: Construction Work Done

Private sector building still shows some resilience but is expected to fall as approvals for new residential construction decline (source: ABS).

Australia: Building Approvals

My concern is that the headwinds will outlast the tailwind, in which case all three construction sectors could fall to 2006 levels.

The ASX 200 continues to advance, headed for a test of its 2007 high at 6830. A declining Trend index would warn of rising selling pressure, while penetration of the rising trendline on the index chart would signal a correction to test support at 6000.

ASX 200

We continue to maintain a high level of cash in our Australian Growth portfolio.

ASX: Iron ore at $120

The ASX is still enjoying a massive tailwind from iron ore prices, with  spot prices close to $120/tonne.

Iron Ore

My concern is how long this tailwind will last. But the ASX 200 advances unperturbed, heading for a test of its 2007 high at 6830. Penetration of the rising trendline is unlikely but would warn of a correction to test support at 6000.

ASX 200

I continue to maintain a high level of cash in my Australian Growth portfolio because of long-term headwinds.

ASX 200 plain sailing at present

Iron ore tailwinds show no signs of abating, with spot prices close to $110/tonne.

Iron Ore

It’s all plain sailing, with the ASX 200 advancing towards its 2007 high at 6830. Penetration of the rising trendline is unlikely but would warn of a correction to test support at 6000.

ASX 200

I continue to maintain a high level of cash in my Australian Growth portfolio because of long-term headwinds.

Australia needs to break the downward spiral

Ross Gittins, Economics Editor at The Sydney Morning Herald, sums up Australia’s predicament:

“The problem is, the economy seems to be running out of puff because it’s caught in a vicious circle: private consumption and business investment can’t grow strongly because there’s no growth in real wages, but real wages will stay weak until stronger growth in consumption and investment gets them moving.

Policy has to break this cycle. But, as [RBA governor] Lowe now warns in every speech he gives, monetary policy (lower interest rates) isn’t still powerful enough to break it unaided. Rates are too close to zero, households are too heavily indebted, and it’s already clear that the cost of borrowing can’t be the reason business investment is a lot weaker than it should be.

That leaves the budget as the only other instrument available. The first stage of the tax cuts will help, but won’t be nearly enough…..”

Cutting already-low interest rates is unlikely to cure faltering consumption and business investment. Low wage growth and a deteriorating jobs market are root causes of the downward spiral and not much will change until these are addressed.

Low unemployment is misleading. Underemployment is growing. Trained barristers working as baristas may be an urban legend but there is an element of truth. The chart below shows underemployment in Australia as a percentage of total employment.

Australia: Underemployment % of Total Employment

How to halt the spiral

Tax cuts are an expensive sugar hit. The benefit does not last and may be frittered away in paying down personal debt or purchasing imported items like flat-screen TVs and smart phones. Tax cuts are also expensive because government is left with debt on its balance sheet and no assets to show for it.

Infrastructure spending can also be wasteful — like school halls and bridges to nowhere — but if chosen wisely can create productive assets that boost employment and build a healthy portfolio of income-producing assets to offset the debt incurred.

The RBA has already done as much as it can — and more than it should. Further rate cuts, or God forbid, quantitative easing, are not going to get us out of the present hole. What they will do is further distort price signals, leading to even greater malinvestment and damage to the long-term economy.

What the country needs is a long-term infrastructure plan with bipartisan support. Infrastructure should be a national priority. There is too much at stake for leadership to take a short-term focus, with an eye on the next election, rather than consensus-building around a long-term strategy with buy-in from both sides of the house.